If you Google “cost of technology per user per year” you’ll get over half a BILLION hits. You can find similar discussion threads on LinkdIn, and a host of other business oriented sites and lists such as the Gartner Group and others. As a software author and vendor, Vertican has always paid close attention to this topic. You should too.
For obvious reasons, it’s hard to generalize. IT costs are affected by a number of factors, ranging from geographic location and number of employees to the type of business and the specialty software in use. For instance, manufacturing companies are apt to spend more on technology than accountants because sophisticated machines, while expensive, are often faster and more reliable than people when it comes to building things. Still, there are benchmarks regarding IT costs that you can use for comparative purposes when you examine your own costs.
One figure that seems relatively consistent across many industries and professions is “5% of revenue is spent on IT”. This benchmark references the cost of licensing and maintaining technology, hardware, software and support (excluding IT salaries) as 5% of a company’s annual gross revenue. So, let’s look at that using a sample company as an example.
Gartner defines “small business” as those with less than 100 employees and under $50 million in annual revenue. So, for example, if a small company with 30 employees and $5 million in annual revenue budgets 5% of that revenue on IT, they’re spending roughly $250,000 annually, or $8,000 annually per employee ($250,000/30) on non-salary IT expenses.
With these numbers in mind, where would Vertican fit into that annual IT spend of $250k in our example company? The answer may surprise you. On average, across ALL Vertican clients, the annual cost of Vertican’s services, including support, software enhancements, EDIs, etc. is $800 per user per year. That’s right, only $800 per user, per year. So, in our example 30 employee, $5million annual revenue company, the annual cost of IT with Vertican would be $24,000 of the annual IT budget of $250,000, or less than 10% of the budget. Seems pretty small, right?
OK. Not so fast. Not included in that annual $24,000 is the original cost of licensing the software. So, if that company had also spent $150,000 on the original software license(s) and hardware, that money must ultimately come from the $250,000 annual budget. If the company borrowed the $150,000 initial investment sum, then certainly the monthly payments on the loan would come from the monthly $20,833 IT budget. If the loan were for 5 years at an interest rate of 7%, the monthly payments would have been just under $3000, or $36,000 annually. But, even if the company had been able to write a check for the entire initial investment, that money could have been spent elsewhere, so the cost must still be counted as part of the company’s IT budget.
This now makes a little more sense. When we calculate the cost of the initial investment as part of the cost of using Vertican software over a 5 year period, along with the ongoing cost of support, EDIs, etc. then IT costs would be about $60,000 annually, or 24% of the budget. That still leaves plenty of room for other IT expenses such as Internet, hardware, copiers, etc. However, even with a support and enhancements contract, eventually software must be replaced. Among other reasons, newly written software is needed to take advantage of newly developed technology. Buying a larger hard disk for more storage wouldn’t have done you any good if you were still using Windows XP because that version of Windows, which had only “32 bit” capabilities, just didn’t have the ability to “see” more than 128 gigabytes, no matter how large the disk itself. So it is with desktop software such as Q-Law and Collection-Master as well. Enhancements are fine and certainly a necessary part of ongoing productivity, but eventually old software must be replaced if it is to keep pace with newer hardware and ongoing performance and compliance requirements. The need to replace older software is a fact of modern debt collection.
The good news is that software has moved from the “large initial license fee” model to the “seat license model”. Under the “seat license model” the user pays a license fee per seat per year and that cost INCLUDES not just ongoing enhancements but also NEW software. If you use Microsoft’s Office 365 you’re already familiar with the seat license model. The same is true with most software today; it’s licensed by the seat and by the year. And the same is true with Vertican’s new software. We’re already licensing our newest product vMedia under this model, and we’ll do the same with all our new and future products. This will include vMaster, which will be the newly rewritten next-generation replacement for both Q-Law and Collection-Master.
There are many advantages to the seat license model. To users of the software, the large initial license fee goes away. It is replaced by a much smaller monthly sum that is easily budgeted, is supportive of affordable growth, and amortizes the full cost of the software over time. The users pay for exactly what they’re using, for as long as they wish to use it. The user gets the new software, the ongoing enhancements and all the support for the same monthly price. There are no large periodic expenditures required to stay current, as that is all part of the seat license model. And, the seat license model scales both ways, so that if a user’s business gets smaller for any reason, their monthly cost will go down. From the software vendor’s perspective the seat license model provides a more steady revenue stream, absent difficult to budget revenue spikes and lags.
It must be pointed out that the seat license fee model is NOT inherently more expensive to the buyer when taking into account the huge up front cost of the large initial license fee model (as well as interest on any money borrowed). The seat license model amortizes the entire cost of everything over time. Yes, the monthly seat license fee is more expensive than the enhancements-only cost of older software. Remember, the user saves the large up front cost, and since software has to be periodically replaced anyway, that large cost can be saved more than once. The reality is that reliable and predictable monthly costs that support new technology and new business requirements is less expensive in the long run than the model in which the user has to pay large re-license fees when new software is required.
The bottom line will always be VALUE. In order to assess value we have to introduce revenue into the equation. In our example company with 30 employees and $5 million in annual revenue, that company is producing over $160,000 per employee in annual revenue. If the cost under the new seat license model to keep that employee working on the newest, most compliant software is just 5% of revenue, that annual per-employee cost of $8,000 is a great formula for success. Any company with this per employee revenue, and expenses such as these, is well positioned for profitability and growth. If your company produces more than $160,000 per employee in revenue and/or your IT costs are less than the 5% average, you’re even more profitable per employee and company wide. Affordable and predictable cost is the value of fixed per seat licenses.
You know your revenue. You know your size. Do the math and we think you’ll quickly embrace the seat license model. It makes sense. It works. It’s a model that supports planning for success.